Bank Refinance: Find the Best Deal

A Bank Refinance May or May Not Be a Better Deal Than a Broker Refinance. How to Pick the Best Offer.

A bank refinance of your home loan can cut your monthly payment, remove a co-signer from your loan, and move you to a fixed-rate loan where your payment will not change for the life of the loan.

How much can you save with a bank refinance? Let’s say you have a 30-year $220,000 loan, which is the average home loan amount in 2011, and are paying a rate of 4.5%, which was the average in 2011. The monthly principal and interest (P&I) cost is about $1,115 per month. Now let’s say you refinance a $220,000, 30-year loan to 3.75%, which is the average rate in June 2012. The P&I totals about $1,019, or a savings of about $95 per month. The average cost to refinance a $220,000 loan would be about $3,400. Therefore, it would take about 35 months, or three years to break-even on the cost of a refinance if you fit the national average and bought last year.

The numbers are even more compelling for people with older, higher-interest mortgages. According to CoreLogic, a real estate data and analytics company, about 20.5 million homeowners have mortgages with rates above 5%. A $220,000, 30-year loan at 5.25% has a P&I of about $1,215. A refinance to 3.75% will save almost $200 per month, which makes the time-to-break-even about 17 months.

Of course, your savings in a refinance will be less or more depending on your interest rate and the amount of your loan.

Your plans for owning the property and where you are in the life of the loan are key factors in deciding whether to refinance. If you plan to sell before you reach the break-even point, then refinancing is a bad deal. Also, if you are 20 years into a 30-year fixed-rate loan, then refinancing may not make sense because most of your payment goes to principal and not interest. The gray area is around 15 years into a 30-year loan. Lenders, not surprisingly, are now offering more 15- and 20-year loans for people who have older loans or can afford to pay more to pay-off the loan in a shorter time period.

Where to Find a Refinance

Homeowners can find home loan refinances from two sources: Banks or brokers. Which is best? Neither and both — it all depends on the deal you are offered.

Banks and credit unions are the department stores of the financial world and want to be all things financial to all people. Brokers are free-agents in home loan lending. Brokers find the best terms available on any given day, and may specialize in market niches. Most mortgage loan officers at banks and credit unions earn a salary and may receive bonuses based on the number of loans they close. Brokers live on commissions entirely. You may find the best deal at a bank or through a broker.

Is a bank/credit union better than a broker? That depends on the deal. It pays to shop and compare rates and costs from different lenders.

Here are the three numbers to focus on when refinancing your home loan:

1. How much will your payment decrease each month? The key number Bills.com readers share when discussing refinances is the amount their monthly payment will decrease each month, which is important but only part of the story. In some cases, it may make sense to refinance if payments stay the same or even increase!
2. How much will your interest expense decrease over the life of the loan? Lifetime interest expense is the key number and is often overlooked by many homeowners when refinancing. The importance of a lifetime interest expense comes into play when a homeowner is, let’s say, 5 years into a 30-year loan and refinances to a 15- or 20-year loan. In this case, the monthly payment may stay the same or increase, but because of the presumably lower interest rates and shorter term, the lifetime interest expense may be cut significantly. The lifetime interest expense may also show when it does not make sense to refinance. For example, if a homeowner is 20 years into a 30-year loan, their payment now consists of mostly principal. Refinancing to even a significantly lower rate may not result in any real savings, even if the homeowner refinances to a 10-year loan. That is not to say it never makes sense to refinance to a 10-year loan — just pay attention to all three numbers we discuss here.
3. What are your closing costs? One of the great surprises in the mortgage business is the variability of refinance costs. For example, some Bills.com readers have shared stories of refinancing $200,000 loans for less than $500, and others report paying about $4,000 for loans of similar amounts. All other things being equal, paying less in closing costs and fees is better than paying more. However, a homeowner cannot look at only the closing costs in isolation without looking at the monthly payment and lifetime interest expense.

In summary, look at all three costs when comparing your offers. Do not chose a loan based on its source — a bank/credit union or broker — because on any given day a bank refinance might be a better or lesser deal than a mortgage broker refinance.